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Discuss the factors on which credit is granted and the cost of credit.
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Process of Obtaining Credit
1. Credit Application2. Documentation3. Processing4. Underwriting5. Closing 6. Funding
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Credit Application• Form on which you provide information
needed by a lender to make a decision about granting credit or approving a loan.
• Provide the following information:– Salary, Employer, Outstanding Credit (Debt),
Assets, Credit References, Checking and Savings Accounts, Stock Portfolio, etc.
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Documentation• Creditor will collect and verify necessary
documentation for the extension of credit.– Examples: Bank statements, credit card
statements, past W-2’s, etc.
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Processing
• Building of loan file.• Evaluating credit worthiness.
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Credit Worthiness Terms (Processing)The C’s of Credit Worthiness• Capacity – Your ability to pay (income)
• Character– Earned by paying bills on time and being a trustworthy,
reliable, stable person.– References – people you have borrowed from in the past.
• Collateral – Security to help guarantee that the creditor will be repaid.
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Credit Worthiness Terms (Processing) continued
• Credit History– Indicates the amount of debt you have and your payment
history.• Capital – How much you have beyond what you owe.
• Credit Limit– Maximum amount you can borrow.
• Cosigner– Responsible for a loan if you, the original debtor, do not
pay.
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Underwriting• Reviewing loan for soundness.• Consumer Reporting Agencies– Company that compiles and keeps records on
consumer payment habits.– Used to evaluate creditworthiness.• Examples: Equifax, Experian, and TransUnion.
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Closing
• Representative explains terms of credit.• Debtor signs appropriate forms.
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Funding
• Creditor will issue credit/funds to the debtor.
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Denial of Credit
• Fair Credit Opportunity Act requires that credit denial cannot be based on sex, family, religion, etc.
• Must be based on ability to pay back loan.
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Cost of Credit• Interest Rates– Percentage that is applied to debt.
• Principal– Amount of money borrowed.
• Time Factor– Length of time for which interest will be charged.
• Maturity Date– Date on which a loan must be repaid.
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• Finance Charge or Fees– Cost of credit stated in a dollar figure
• Annual Percentage Rate (APR)– Indicates how much credit costs on a yearly basis.
• Grace Period– Time period during which no finance charges will be
added to an account.
• Cash Advance– Borrow money on a credit card.
Cost of Credit continued
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Simple Interest Formula
I=PRTI=InterestP=PrincipalR=RateT=Time
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